Why Are Rents Skyrocketing, And What Can A Renter Actually Do About It?

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Why this show

Good afternoon and welcome to Mortgage Mom Radio. I'm Debbie Marcoux and I am the Mortgage Mom. Today we're going to be talking about skyrocketing rents — how that's hurting you if you're a renter, and what it means for investors and builders. It's a very hot topic, because I believe many of you who watch this show are renters trying to be first-time buyers.

I had a client reach out just last week who said: that's it, I'm done, I've had it, I'm over it. I want to buy a home and I need your help, I don't even know where to start. He's looking at new rentals and there are thirty to forty applications per rental. There are people offering to pay more per month to get their application accepted over somebody else's. It reminds me of what was going on last year and in 2020 with people trying to buy homes — thirty or forty offers per property, overbidding, trying to stand out from the crowd. That is happening to you right now if you're a renter.

What listeners were seeing

A listener in Arizona wrote in: rents are very difficult to get right now, and landlords also want a tenant to make four times the monthly rent just to qualify. That's a great point. I've been looking at rents all across the nation, and many listings state in the comments what the landlord is looking for — often anywhere from three to four times the rent amount in documented monthly income. That can be very difficult for somebody who makes tips, brings home cash, and doesn't show all of that on pay stubs or W-2s. The rental market is getting tighter, there are fewer rentals, which makes rents more expensive, and more people need them. We really do have a housing shortage, and we've been talking about that for years on this show.

Another listener in California said rents have gone up recently, deposits are higher, and landlords aren't taking pets. That's correct — California has a statewide cap on how much a landlord can raise the rent each year.

And a listener who moved out of California to Tennessee said: buying was the best choice we could ever have made. Instead of throwing $3,500 a month into a sinkhole in California, we're paying $500 less a month for our mortgage in Tennessee, and we're making money because it's going up in equity.

Rent versus own: when you break even

He's absolutely right. When we run the rent-versus-own calculators, we usually find that even counting the down payment and the closing costs and everything rolled in, you'll typically save more by owning than by renting after about three to four years. Which is really nothing, when you consider the amount of money you have to lay out to get into the property.

And that's assuming zero appreciation — assuming your property gains no value at all over that time. You'll break even in about three to four years depending on where you buy, the price, the rent you were paying before, and how much you put down.

Buy small, keep it, repeat

One of the things I've been telling you for years is that the very best thing you can do is buy your first home with as little money down as possible. Then when you're ready to move, buy the next property with as little down as you can, move into that one, and rent the first one out. And keep doing that, over and over, to create your own real estate portfolio.

As rents continue to increase — and it's across the nation; so far today we've heard from Tennessee, California, and Arizona — they're going to keep going. Why they're going to keep going is what we're going to talk about today.

The article: rent is driving inflation

I pulled up an article from The American Prospect, and the name of it was very interesting: “Skyrocketing Rent Is Driving Inflation.”

Now, in my opinion as the Mortgage Mom, I don't think it's rent that is driving inflation across the country — obviously there are so many things driving inflation. But one of the things that is inflating is rent, and I do agree with that piece of the article. So I'm going to read you a couple of tidbits I pulled out that I thought were really important for people to hear.

It says: in fact, as the Council of Economic Advisers reported, the increase in rents was responsible for almost 40 percent of the core CPI number in May. Worse still, the shelter index's 0.6 percent increase in May marked the largest monthly increase since March of 2004. According to the Bureau of Labor Statistics, the year-over-year increase is the largest since 1991.

It goes on: at least 35 percent of Americans are renters, and anyone who has moved recently or whose landlord has reset the price is feeling the squeeze. According to a recent report from Redfin, the national median asking rent was two thousand and two dollars in May — the first time it has ever eclipsed the $2,000 mark. That represented a two percent gain from April, and a stunning 15.3 percent rise year over year.

So just from April of 2022 to May of 2022 we saw a two percent gain in what rent costs. And year over year, a 15.3 percent increase.

It continues: both rent, and owners' equivalent rent — the amount of rent that would have to be paid in order to substitute a rental property for a currently owned house — are on a historic inflationary tear. These are the two major factors the BLS uses to calculate shelter costs, and they are not slowing down.

If you guys can hear me: they are not slowing down. That's the thing I want to talk about.

Why a fixed payment is the hedge

I've done show after show about how you need to buy a house, become a homeowner, plant your roots, build equity. But let's pretend you don't build equity. Let's pretend your home falls in value. Let's pretend it goes down year over year while prices and rents go up.

Even if your home value dropped — if you buy a home and you have a fixed 30-year mortgage, your monthly payment is not going to change. It is the only way you can lock something in and hedge against the inflation of future rents.

If you own a home today, that's amazing, and I'm happy for you. We do plenty of shows for homeowners on refinancing and paying off debts and we'll get back to those. But today is about renters — and about current owners, because is now a good time to buy an investment property? You can lock in a price and a payment, put a renter in there who covers it, and raise the rent a little each year.

Q&A: when to start qualifying

Sunshine asks: “If I'm in a rental now and I have six months left on my contract, when would be a good time to start qualifying for a loan?”

That's a fantastic question and I get it a lot. Today is the 24th — we're at the end of August. We just got a call yesterday from somebody who said, I'd like to start looking for a home in September or October, what do I need to do? And there's quite a bit that has to go into play. We need to talk about income, we need to talk about credit. This particular couple is looking to transfer from one state to another and they haven't even started to look for jobs yet. They don't know what jobs they'll have or what their income will be. That makes it very, very difficult to get things done in less than a month.

So truly, the very best thing you can do: if your goal is to buy a home within the next year, get the phone consultation. Let us help you make a plan and figure out the roadmap. Where do you live? Where are you looking to buy? What are your credit scores today — do you have credit, do we need to build credit? What's your income? Do you work from home, can you keep the same job, do you need to transfer within the company, or do you need to secure brand new employment?

Based on those things we talk about what we need to see to get you a loan, how much money you need down, and what you'd like to buy. Everybody's in a different spot. You could be buying rural and might not need anything down — you could get into a USDA loan. You might want to buy a farm, which is a completely different kind of loan depending on the acreage. It depends on whether it's a condominium. It depends on the loan limits for the county you're looking in.

Sometimes you'll find out you're ready to go, and the conversation is: why are you waiting? You've got everything you need right now, let's do this. Sometimes you find out you need some planning and it's going to take about twelve months.

So the first thing is to call and get a consultation if your goal is to own a home, even a year out. Number two: if you want to buy something, about six months is a good time to actually get the pre-approval started, and four months is probably the longest I'd wait. If you're trying to buy in December, it's already August — you should be reaching out today. If you're looking in January, reach out today.

Why the end of the year matters for your income

Why that much time? Right now is actually a perfect moment for people to start reaching out. It's the end of August, we're rolling into the last quarter.

If you're self-employed, if you make commissions, if you bring home cash tips — this is a good time to talk about what income you're going to claim. What did you claim last year? How much overtime did you work last year versus this year? Why does that matter? Because when you work overtime, earn commissions, receive tips, or are self-employed, we look at a two-year average.

So if 2021 was great but you're not pacing the same in 2022 — you've been working a little less — we might talk about throwing it into high gear to get extra hours onto those pay stubs before the year closes, since you want to buy in January or February. If you're self-employed, we want to look at your tax returns: what did you file, what did you show, are you showing enough income for what you're trying to buy? Maybe in 2022 you need to claim a little more. Maybe you already claimed more than enough and don't need to do it again.

So if you're looking to buy in the first quarter of 2023, or sooner, you should be dialing us right now.

Why the reported numbers lag reality

Another section of that article: there's plenty of reason to believe the rent crisis is actually worse than the BLS data indicates. Because rents are often tied to 12-month contracts, those trends can be slower to surface, as they're only enacted once contracts come up for renewal.

It's slow going. We're not going to see the numbers change immediately, because many of you are locked into a rent payment on a 12-month contract. So you may be sitting back thinking, I've got great rent, I've got nothing to worry about — and then when you come up for renewal you might be surprised to find they're going to reset the rent.

That is happening, and it's happening everywhere. Don't believe you're somehow sheltered because you're in a rental contract. You're not. When that contract comes up, the landlord has the right to change the terms, and you have to agree in order to stay. If you don't agree, you have to move — and then you jump into this cesspool of trying to find another rental with people outbidding each other to get their application accepted.

Q&A: qualifying with a low credit score

Jason asks: “My credit score is low. Are you able to see what I need to do to qualify for a home loan and get out of a rental?”

Yes. We do have loan programs available for people with lower credit scores. As a matter of fact, we just had a company memorandum go out talking about how we have more investors starting to open up their guidelines, especially in the FHA space, where they'll now look at loans with FICO scores as low as 550. We're seeing 550s and 560s pretty regularly right now. That's really amazing, because it opens up the ability to buy for many people who thought they couldn't. VA loans don't actually have a minimum credit score requirement from the agency, though finding an investor willing to buy the loan can make that a little more difficult.

FHA also has what I like to call the do-over loan. If you've had a bankruptcy, a short sale, or a foreclosure, those are okay — not okay all the time, but okay with much shorter seasoning guidelines. If you had a bankruptcy and you're in a Chapter 13 on a repayment plan and you've made at least twelve monthly payments, you actually have the opportunity to get FHA financing while still in that Chapter 13. If you did a Chapter 7 and wiped out all of your debt, you have the opportunity after two years — and if there were extenuating circumstances behind the bankruptcy, there's actually an opportunity after one year.

So there are definitely options for people with lower scores or some sort of credit deficiency. And even if the answer is no today, the answer is not no. The answer is when — how do we get you there, how far are we looking, and what roadmap do we need to make to get you to your goal.

“Date the rate and marry the home”

A listener says he loves the phrase “date your rate and marry your home,” and that he just found out about the tax write-off on a house. Yes — you can write off your interest and your property taxes, as well as mortgage insurance. Those are things we can talk about.

And yes, date your rate and marry your home. You see it on TikTok all the time, you see it on Facebook, everybody's starting to say it, and it is a great reference. If rates drop from where they are today, we can always refinance and lower the rate. But it's your home, it stays your home, nobody can kick you out, nobody can tell you to leave, and nobody can raise your rent. At the end of the day you need that security blanket, and you need to know that nobody can hand you future increases. That's how you guard yourself against inflation on your own as a homeowner. You cannot do that as a renter.

Q&A: how much to save for a down payment

A listener asks: “I have good credit and not a lot of debt, but I need to save for a down payment. How much do I need to save?”

Every single person is different, and where you're buying matters. If you've got great credit and good income and you're going to buy something a bit further out, not necessarily in the city, you have the option of a USDA loan at zero down. If you're a veteran, zero down.

If you're not buying rural and you're not a veteran and you're trying to get in with zero down, there are down payment assistance programs we can look into. Those change based on the county, the city, and the state you're buying in, so it really does depend on where you're looking. And remember that many down payment assistance programs are based on income — if you make too much, you may not qualify.

So let's pretend you don't qualify for assistance, you're not a veteran, and you want to buy a high rise in the city. Great, not a problem. What's your minimum down payment? It depends on your sales price and the county limits. But let's say you're buying at an average price in your city — you can get in with as little as three percent down or three and a half percent down, conventional or FHA, and we'll talk about which is better for you.

If you can save yourself about three percent, you should be in really good shape. Even if we can get you into down payment assistance, now you've got extra money set aside for moving, new furniture, fixing things up, repainting, new carpet. So three percent is usually a really good number to have in the bank — but again, we've got opportunities to get people in with nothing. How do you know which applies to you? You have to call us and talk about your scenario.

Homeowners: keep the house you're leaving

Now let me talk to homeowners. What's a good investment at the current moment?

As I said at the top of the show, the best advice I can give is: buy your first house with as little out of pocket as possible, live in it, love it, and when you've outgrown it, buy another one a bit bigger with the lowest down payment you can get — saving that down payment while you're living in the first home. Then rent out the property you just left.

Here's why that matters right now. If you own a home and you bought it over the last four or five years, the rate you have is phenomenal. In 2016 we were writing loans in the fives. In 2017, high fives and low sixes. 2018, 2019 — and then you all know what happened in 2020 and 2021, they came down a lot.

So if you own a home today and you had the chance to buy or refinance while rates were low, and your rate is under four percent, the idea that you would let that home go, sell it, take the cash, and buy something else is silly. You will never be able to get lending at that dollar amount again. You'll never be able to keep that money at that low rate. And you'll never be able to go buy another property at that rate, especially as an investment.

So my homework for you this weekend: figure out what money you could scrape together. Maybe you're thinking about downsizing. Maybe you're ready to retire and don't want something so big. Maybe the kids went off to college and you have more house than you need. Whatever that situation is — if you've been considering a move, consider this instead: hold on to the property you have. Call us, and if you need cash out of that property to go buy something else, we can talk about the options. But the goal is: don't touch what you own today. The house, the balance, the rate — leave it.

Then do the research. What is your monthly payment — principal, interest, taxes, insurance, mortgage insurance if you have it, HOA dues? What is your whole nut every month? Then: what are rents in your neighborhood going for? How much could you rent your property for? And then: what would that rent be next year, if things go year over year the way they just did from 2021 to 2022? If we saw a 15 percent increase, where could your rent go? Look it up for your area. If you could move it ten percent, or fifteen — where does your cash flow land, with somebody else living in your home, making the payments on the mortgage, and paying your debt off for you?

Also consider that the Federal Reserve has said they're not going to stop raising rates. They're talking about possibly increasing again within the next couple of weeks by another three quarters. So if you can buy something now and lock something in while we still have rates in the fives, why would you not? Go find yourself something today, lock in what's still fantastic money, keep the rate you already have — which is beyond bizarre that we were all fortunate enough to obtain in 2020 and 2021 — and rent it out. Start building your portfolio. Don't be scared.

Q&A: borrowing against your home to buy another

A listener asks: “Is it possible to borrow against a current home to buy an investment property?”

Yes it is, and that's where I was going. If you can scrape together a minimum down payment to buy another home, fantastic. If you can't, we can look at ways to get funds out of your existing home. We have home equity lines, we have home equity loans, and you can refinance the property to pull cash out.

The whole goal is: if you have a rate around five percent or less on your existing mortgage, keep that rate where it is. If you have a rate at two, two and a half, three, three and a half percent, I don't want to change it. We could do an equity loan to get you some cash out to go buy the next property with a minimum down payment — pulling out only what's absolutely necessary — because that extremely low rate on the current mortgage is how you're going to cash flow when you rent it out.

Now keep in mind, the strategy I'm talking about today is you occupying the next property. It's not about buying an investment home while staying where you are. That is also a strategy, and it should absolutely be on your radar if you've been thinking about becoming an investor — but what I'm talking about today is owner-occupied to owner-occupied, because that's what lets us do minimum down payments. When you buy purely as an investment, you'd need a much larger down payment, depending on the price, the number of units, and the property type. Buying for yourself, you can get in with an FHA loan at three and a half percent down or a conventional loan at five percent down within particular county limits.

Why a crash would make renting worse, not better

Based on this article and every other one I've read for the last five or six months, rents are not slowing down. They're going to continue to move and continue to get worse.

And here's the part people don't think about: even if we had a housing market crash, there would be a ton of people who make the wrong decision because their home is no longer worth what they paid, and let it go to foreclosure. You've now created a whole new massive pool of people who need to rent. So the rental crisis we're in today, if the housing market were to crash, becomes an even bigger rental crisis — because you've got even more renters.

If you don't believe me, don't take my word for it. Google it. Find out what happened during our recession of 2007, 2008, 2009. How many renters were there? What did rents do during those years? It does happen.

Which, to be clear, is not me predicting a crash — personally I don't think we're going to see any kind of crazy massive crash. But rents that continue to go up? They always have, and they will. So do that homework. And if you're a renter and you haven't made a plan to buy a home, I've got to tell you: you're bleeding, and you need to stop the bleeding.

Why this is happening

So why is this happening? Number one, we've been low on housing. Everybody knows we're already short the number of homes we need for the population we have, and that's especially true in major cities.

Number two, building was happening — builders were out there, they were building, they were getting new tracts out, everything was going wild. But just like everyone else, when rates go up it costs more to get the financing they need to build. So we're starting to see builders slow down. We're seeing fewer tracts pop up. We're seeing new permit applications through the cities slow down, which means less building and less new housing coming to market.

Meanwhile we have more people every day who need somewhere to live. So rentals are big right now, and it's a great place to start thinking about future investment and about starting a real estate portfolio if you don't have one.

Wrap-up

If you don't own a home and you haven't thought about owning one — if you think the best thing to do is sit and wait a year to ride out some massive crash that's coming — I can tell you that's probably not the best idea. Give us a call and talk to us. You're welcome to speak with me, or with anyone on my team; we're all very knowledgeable and we've all been in the business a very long time. I started my career in 1994, and the loan officers on my team started in the late nineties and early 2000s. We've all been through the roller coaster. We've all seen rents go up while people were losing homes. We've seen pretty much everything that's happening today.

Call us at 844-935-3634, that's 844-WE-LEND-4. Somebody answers the phone seven days a week from 9 to 5 Pacific, and outside those hours the call service will book you an appointment. If nothing on the calendar works for your schedule, go to mortgagemomradio.com and use the contact form — it comes to me directly and I'll make the arrangement.

To be part of the live show, text the word MOM to that same number: one text a week with a link straight to the YouTube channel, every Wednesday at 1 p.m. Pacific. I will not be on next weekend for my Saturday and Sunday radio listeners — we go dark for the holiday, so you may hear a rerun. If you need anything in between, please reach out. I'm Debbie Marcoux, I am the Mortgage Mom, and until next time I hope you all have a fantastic week and weekend. Take care.